Commentary

In this shared blog, David Weisberger says a recent WSJ article is wrong and that traders do need to purchase faster and more comprehensive market data to avoid being fined for violating "Best Execution" obligations.

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Executives at Knight Trading Group like to say their firm is not a trading company with excellent technology, but a technology company with excellent traders. They exaggerate.

Knight, nevertheless, aims to use technology to redfine the role of the market maker. And it is spending big bucks to do so.

In early April, Knight, formerly known as Knight/Trimark Group, announced it would spend $100 million over the next 12 to 18 months on technology for electronic trading, information management and global systems integration. To oversee this sizable upgrade and expansion of its infrastructure it hired Ernst & Young's chief technology officer, David Shpilberg. He is both CTO and chief operating officer at Knight Trading Group.

Shpilberg's hire comes as Knight gears up to make markets in stocks in Europe and Japan and derivatives in the U.S.

In the last year, Knight, the largest market maker in the U.S., has taken a 20 percent stake in Easdaq, an electronic stock exchange in Europe; bought Quartz, a British market maker; leased the former trading floor of the London Stock Exchange; negotiated a joint venture with Japan's Nikko Securities; and made numerous investments in options dealers and exchanges.

Shpilberg must facilitate this expansion in addition to improving Knight's core Nasdaq trading operations in Jersey City and listed trading operations in Purchase, N.Y.

(Knight is slated to move its Jersey City headquarters, which houses the Nasdaq trading floor, up a few doors on Washington Boulevard next year. That would give Knight 266,000 square feet, more that doubling its current space.)

Shpilberg's job is to automate as many of Knight's operations as possible. That means deploying faster and smarter computers to do the actual trading and manage positions. It means exploiting data mining technology to improve decision-making. It means delivering trade reports to clients on a real-time basis. It means linking market making operations in the U.S., the U.K. and Japan. And lastly it means building connectivity to customers, suppliers and markets.

Knight takes connectivity seriously. To move orders from its e-broker clients as fast as possible it has invested in advanced network technology. Knight's internal network is based on gigabit ethernet technology that transmits data at one billion bits per second. Transmission to clients is over dark fiber optical cable in which data moves at rates up to 96 gigabits per second.

No Choice

In a world where spread-based trading is being replaced by position management and volume is going through the roof, a wholesaler like Knight can't afford not to build faster and more intelligent systems. "We are the next-generation marketmaker," Shpilberg said.

Shpilberg argues that Knight's traders are position traders and not spread traders. Profits are not made by buying a stock at one price and selling it at another. Profits are made by managing inventory. Shpilberg likens Knight traders to supermarket inventory managers. Stocks are akin to products on the shelf.